RPSM09104120 - Technical Pages: Member benefits: Lump sums: Pension commencement lump sum: Overview:
If the lump sum was paid on or after 6 April 2011 you should first read RPSM09104195.
Payment of a pension commencement lump sum
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When a member has become, or is to become entitled to certain authorised pension benefits under an arrangement under a registered pension scheme then, subject to certain conditions, the scheme may also provide that member with a level of tax-free lump sum.
Such a payment is referred to in the legislation as a pension commencement lump sum.
The conditions required for a lump sum paid by a scheme to a member to be a pension commencement lump sum (and therefore be tax-free) are set out on RPSM09104130.
The legislation limits how much of a lump sum may count as a tax free pension commencement lump sum. That limit is known as the permitted maximum. Anything paid above the permitted maximum is not a pension commencement lump sum (see RPSM09104180). However, if the excess is covered by The Registered Pension Schemes (Authorised Payments) Regulations 2009 SI 2009/1171, the excess amount may nonetheless be accepted as an authorised payment and treated under the tax rules as a pension commencement lump sum. See RPSM09108040 and RPSM09108050 for further details.
In certain circumstances a payment representing an intended pension commencement lump sum can be paid as an authorised member payment after the member has died. This can apply where a payment was due under scheme rules but entitlement under the tax rules was not established before the member died. See RPSM09108050 for further details.
[SI 2006/135 The Registered Pension Schemes (Meaning of Pension Commencement Lump Sum) Regulations 2006 as amended by SI 2007/3533]
The requirement that a pension commencement lump sum must be paid within an 18 month period starting 6 months before and ending 12 months after the entitlement arising to that lump sum payment is waived in certain circumstances. These circumstances are where payment of such a lump sum has been restricted incorrectly due to the underestimation of the member’s available lifetime allowance, and any excess lifetime allowance charge paid by the scheme administrator is subsequently refunded to the scheme - see RPSM11105360. If the further lump sum is paid within 12 months of the scheme receiving the refund from HM Revenue & Customs, it can still be treated as a pension commencement lump sum even if the member has reached age 75, providing all the other conditions are met.